China bank prof­its flat-line as bad debts con­tinue to soar

The Pak Banker - - FRONT PAGE -

China's big four state-run banks this week are set to re­port an­nual earn­ings growth that likely flat-lined af­ter around a decade of ter­rific profitabil­ity, as a surge in soured loans con­tin­ued un­abated while eco­nomic ex­pan­sion weak­ened. Profit growth has slowed in re­cent years while the sec­tor tack­les its great­est chal­lenge since the global fi­nan­cial cri­sis, with bad loans at a 10 year high while funds set aside to cover the losses fall close to reg­u­la­tory lim­its.

While banks ramped up lend­ing dur­ing a gov­ern­ment stim­u­lus drive dur­ing the melt­down, much of that lend­ing went to in­dus­tries where rapid ex­pan­sion de­vel­oped into over-sup­ply as eco­nomic growth ta­pered, rais­ing the risk of de­fault and drag­ging on prof­its. For 2015, an­a­lysts es­ti­mate net profit at the Big Four to range from 1 per­cent growth to 1 per­cent de­cline, showed Reuters cal­cu­la­tions based on data from Starmine SmartEs­ti­mate.

Bank of Com­mu­ni­ca­tions Co Ltd, China's fifth-big­gest lender, re­ports earn­ings on Tues­day, fol­lowed on Wed­nes­day by In­dus­trial and Com­mer­cial Bank of China Ltd (ICBC) and Bank of China Ltd (BOC).

China Con­struc­tion Bank Corp and Agri­cul­tural Bank of China Ltd re­port on Thurs­day. Fitch Rat­ings, in a re­search note on March 22, said banks are likely to an­nounce "con­tin­ued sub­dued earn­ings growth amid mar­gin com­pres­sion and as­set de­te­ri­o­ra­tion."

Six cuts in the cen­tral bank's bench­mark in­ter­est rate over 17 months has nar­rowed lenders' net in­ter­est mar­gins - or the dif­fer­ence be­tween in­ter­est earned on loans and funds ex­tended. An­a­lysts ex­pect slow eco­nomic growth and re­forms to prompt more cuts. Non­per­form­ing loans (NPLs) reached a 10 year high of 1.27 tril­lion yuan ($195 bil­lion) last year, or 1.67 per­cent of all loans out­stand­ing as of De­cem­ber, showed data from the China Bank­ing Reg­u­la­tory Com­mis­sion. How­ever, an­a­lysts said some banks ap­pear to be de­lay­ing rec­og­niz­ing some loans as soured. The po­ten­tial real bad loan ra­tio may be 8 per­cent to 9 per­cent, bank­ing an­a­lyst Li Nan at Bei­jing Gao Hua Se­cu­ri­ties wrote in a re­cent re­port.

Hint­ing at the ex­tent of the prob­lem, the reg­u­la­tor has is­sued a se­ries of no­tices in re­cent weeks high­light­ing the risk of debt ex­tended to in­dus­tries suf­fer­ing over-ca­pac­ity, and ad­vis­ing banks to quickly dis­pense of bad loans.

The cen­tral bank is also pre­par­ing to let banks ac­cept debt-for-eq­uity swaps to lower lever­age in the cor­po­rate sec­tor. Last week, share­hold­ers of ship­builder-turned-oil ex­plorer China Huarong En­ergy Co Ltd voted over­whelm­ingly in fa­vor to swap $2.7 bil­lion in debt for eq­uity, in what would be a test case for the new pol­icy. "This is a way to avoid an ex­plo­sion of non-per­form­ing loans," said a se­nior Big Four banker, who was not au­tho­rized to speak pub­licly on the mat­ter and so de­clined to be iden­ti­fied. "When a loan is con­verted to eq­uity, it in­creases ef­fi­ciency, (by) tak­ing it off the bal­ance sheet." Chi­nese banks are re­quired to set aside funds equiv­a­lent to at least 150 per­cent of bad loans to cover losses. That loan loss pro­vi­sion for the sec­tor as a whole was 181 per­cent at the end of last year.

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